US stock market faces more volatility in 2019

By Yi Xianrong Source:Global Times Published: 2019/1/6 16:13:39

Illustration: Xia Qing/GT

The US stock market has been extremely volatile during 2018. From December 4 to 24, the Dow Jones Industrial Average slumped 4,000 points within 15 trading days. In fact it has rather contradicted with the tradition that US stock market usually performs well in December. By Monday, Standard & Poor's 500 index (S&P 500) had accumulated a 14.8 percent drop in December, worse than the 14.5 percent losses within the 12 months of the 1931 collapse during the Great Depression.

As statistics from Goldman Sachs and CNBC demonstrate, once the S&P 500 falls into bear market, it will take 13 months on average to end the bearish trend. And it will drop 30 percent before climbing out of the bottom.

But it is not reliable to make inference to the US stock market trend in 2019 based on the past experience. This is because the external environment of US stock market, as well as the stock trading instruments and mechanisms have seen radical changes. To contradict the aforementioned "bear market rule," the US stock market has skyrocketed on December 26. The Dows surged more than 1,000 points, up almost 5 percent, with the largest one day point gain ever. The price for crude oil went up with even more madness. The slump and surge like a rollercoaster has revealed the extremely high stakes in the US stock market.

The reasons for the recent crash of the US stock market lie in the real economy, the market itself and other man-made reasons. The market expects slower global economic growth in 2019. The trade frictions are going to aggravate tensions among countries. Central banks in countries worldwide are stepping on the accelerator pedal to monetary normalization. The Dow rose to 26,951 points in 2018 from around 6,000 points in 2009, which is more than four times over 9 years. In this bullish market stretching 10 years, FAANG - five major technology companies Facebook, Apple, Amazon, Netflix and Alphabet which owns Google - was the main driver with their soaring stock prices. Now is time for a stock market correction. In this major stock market adjustment, the Nasdaq Composite Index, which reached its new high in August this year, has lost $3 trillion market value. Among them, $1 trillion of market value for FAANG was wiped out. Without those adjustments, the US stock market cannot return to a normal position.

So far, the US stock market became volatile due to two main man-made reasons. One of the reasons is US President Donald Trump, who is the biggest risk, causing gyrations to stocks and the stock market. Since Trump took power, he has been generating market risks, trying to force the market to go his way and bombarding the market with new economic policies. On account of his personal motive, Trump has been attacking US Federal Reserve Chairman Jerome Powell on the interest rate hike, threatening to fire him. The uncertainties Trump has intentionally brought to the market will definitely shake the market. As long as he is the US President, domestic and international investors should be wary about the market uncertainties stirred by Trump.

Additionally, program trading, which is now prevalent in the market, is also one of the major reasons behind stock market swings. Currently, quantitative hedge funds - those relying on computer models - account for 28.7 percent of all trading on US stock markets, a share more than doubling the figure over the past five years, the Wall Street Journal said in a recent report.

With computer programs taking charge of trading, meaning the execution of securities trading by computer programs based on preset strategies, investors tend to act in synergy, thereby resulting in an even steeper selloff amid a market downturn which may even spark a stock market rout.

Other than that, the US market faces the risk of surging corporate debt. Total corporate debt hit nearly $9.1 trillion halfway through 2018, a whopping rise of 86 percent from the levels in 2007 when the financial tsunami was starting.

As the US eases supervision over the banking sector, allowing banks to continue piling up debt, many banks now turn to peer-to-peer lenders and small lending institutions. The number of shadow banks in the US is on the rise. All these could easily add to risks faced by the US financial system, therefore weighing on the US stock market in 2019. The coming year will turn out to be even more turbulent for US stocks.

The author is a professor with the School of Economics at Qingdao University.


blog comments powered by Disqus